Risky assets reel as China allows yuan to fall for second day

MSCI's broadest index of Asia-Pacific shares outside Japan falls 1.5% to two-year lows

Asian stocks and emerging currencies tumbled on Wednesday and commodities fell after China allowed the yuan to fall sharply for a second straight day, forcing investors to seek refuge in safe-haven government debt.

On Wednesday, the People's Bank of China set its midpoint rate weaker than Tuesday's closing market rate, which had already fallen sharply after China devalued its currency by 2% in a surprise move.

The central bank had billed Tuesday's move as a free-market reform but experts suspect it could be the beginning of a longer-term slide in the exchange rate to make China's ailing exports more competitive.

The rapid drop in the value of China's currency -- more than 4% in the last two days -- dealt a body blow to appetite for risky assets globally, with equities, currencies and commodities coming under selling pressure as money managers weighed the implications of China's latest policy move.

MSCI's broadest index of Asia-Pacific shares outside Japan fell 1.5% to two-year lows. Stock markets from Australia to Singapore were a sea of red in early deals.

Jens Nordvig, managing director of Nomura Securities, said in a note the yuan's weakness over the last two days has the "potential to turn into a trend very quickly" and can impact US growth and "meaningfully impact risk sentiment".

The Dow fell 1.2% and the S&P 500 shed 1% as China's currency move on Tuesday added to worries about the global economic outlook and hit companies with large exposure to China, such as Apple Inc and Caterpillar.

Many Western firms have already been reporting slowing sales in China as its economy cools.

Emerging market currencies from Indonesia to Brazil reeled as investors feared central banks around the world could rush to weaken their own currencies in response.

That meant only the greenback was left standing tall with the US dollar holding near a two-month high of 125.15 yen, while the broad dollar index was stuck within recent trading ranges.

Currencies considered as China proxies were singled out for special punishment, with the Australian dollar nursing losses at 0.7255 per dollar after falling more than 1.5 perent overnight.

"The bottom line is that we believe investors will orientate portfolios towards more rate cuts rather than currency weakness. Real rates are way too high, in our view," wrote Sean Darby, chief global equity strategist at Jeffries.

Commodities investors worried that prolonged yuan weakness could revive deflationary pressures, with a 19-commodity Thomson Reuters/Core Commodity CRB Index holding near lows not seen since 2003.

US crude oil futures fell more than 4% overnight to a six-year low before managing to recover 1.1% to $43.57 a barrel early on Wednesday. 

Copper and aluminium also hit six-year lows on Tuesday as the cheaper yuan fueled worries the world's top metals consumer would cut back on imports. 

Copper posted a modest bounce after the overnight slide, with three-month copper on the London Metal Exchange (LME) edging up 0.7% to $5,159 a tonne.

Bonds were the solitary bright spot, with the the benchmark 10-year Treasury note yield sliding five basis points to a three-month low of 2.087%.

Its 10-year Japanese counterpart fell to a three-month trough of 0.38%.